Thailand - CARI ASEAN Research and Advocacy

Economic Snapshot: ASEAN Focus May 2017 | Thailand

Published on 22 May 2017
by Debapriya Mukherjee, CFA, Economist, CIMB ASEAN Research Institute

In 2017, moderate economic recovery is expected in Thailand with public spending continuing to be the engine of growth. The government will use public expenditure in areas such as infrastructure, to try and crowd in private investment. While rising farm incomes and improved confidence are likely to support private consumption. The external sector was helpful here as in other ASEAN countries; exports in USD terms grew by 6.6% in 1Q17, the highest rate in over 4 years. Inflation remains soft even though it has rebounded, and is expected to be well within the Central Bank’s target range. The policy rate has been held steady since April 2015 at 1.5% and is unlikely to change in 2017 even with rising US rates. The current account surplus should remain strong. However, given the uncertainty in the global economy, exchange rate and capital flow volatility is likely to persist in 2017. The Thai baht (THB) is expected to end the year at close to 35 to the USD.

Growth stable in 2017- fiscal expenditure to be the driver of growth

The Thai economy grew by 3.2% in 2016, edging higher from the 2.9% clip in 2015. The economy was largely supported by public expenditure, rising farm incomes, tourism, and exports. In 4Q16, economic activity saw a mild decline to 3% growth yoy compared to 3.2% in 3Q16. This was due to sluggish private consumption growth at 2.5% yoy in Q4 vs 3% in Q3, and lower private investment. A decline in tourism arrivals was also observed during the same period following the passing of King Bhumibol. In the period following the king’s death consumer sentiment and business confidence slipped.
The recently released 1Q17 GDP print came in at 3.3% yoy growth, a tad higher than the expected 3.2%. Public investment and exports continued to provide the fillip. At the same time, private consumption data has shown resilience, primarily the result of pent up demand.
Sentiment for private investment remains weak, contracting for three consecutive months. One way to address this would be to accelerate public-private partnership schemes to increase corporate involvement in developing infrastructure.
In 2017, a broad based expansion in economic activity is expected. Though public spending will remain an important lever, recovery in global trade and commodity prices, as well as rising domestic demand will be the other supporting factors. For the year, growth is expected to average at 3.5%.
On the supply side, things look stable. The tourism sector remains strong having overcome the temporary slowdown of 4Q16. Rising farm incomes and agri-commodity prices are driving private consumption, while manufacturing activity is being buoyed by a recovery in exports.

Inflation edging up but within target

Inflation averaged 0.2% in 2016, reversing its six-year downward spiral, largely due to a rise in global commodity prices. Bond yields have risen as inflation has turned positive, reducing the differential with US 10 year Treasuries.
Headline inflation was 0.7% in Q416 and 1.3% in 1Q17.
Despite higher commodity prices, inflation should be well within the stipulated target of 1-4%.

External position remains strong

In 2016, the Thai baht averaged 35.28 baht to a USD, depreciating by 2.9% over the previous year. The currency depreciated in 4Q16 in line with other regional currencies as the USD strengthened post the US elections.
The baht has strengthened this year with foreign appetite for Thai debt growing, potentially presenting a problem for policymakers at a time when exports have shown signs of recovery. Foreign portfolio investors appear to be attracted to Thailand’s “safe haven” status owing to its large current account surplus and sizeable foreign exchange holdings. The baht appreciated against the dollar in 1Q17 to 35.11 baht per USD.
The policy rates have remained on hold since April 2015 at 1.5%. The central bank is unlikely to raise rates at present as inflation remains under control, demand is tepid and the external position of the country remains strong.

Rates to be on hold; currency volatility expected

In 2016, the Thai baht averaged 35.28 baht to a USD, depreciating by 2.9% over the previous year. The currency depreciated in 4Q16 in line with other regional currencies as the USD strengthened post the US elections.
The baht has strengthened this year with foreign appetite for Thai debt growing, potentially presenting a problem for policymakers at a time when exports have shown signs of recovery. Foreign portfolio investors appear to be attracted to Thailand’s “safe haven” status owing to its large current account surplus and sizeable foreign exchange holdings. The baht appreciated against the dollar in 1Q17 to 35.11 baht per USD.
The policy rates have remained on hold since April 2015 at 1.5%. The central bank is unlikely to raise rates at present as inflation remains under control, demand is tepid and the external position of the country remains strong.

Risks and other issues

On the external front, there is uncertainty regarding US trade and fiscal policy. With the US and China being the top two export destinations, accounting for 11.2% and 11.1% of Thai merchandise exports (55% of GDP), external demand shocks could have a dampening effect on economic recovery.
Slower credit growth indicates that credit standards have been tightened in Thailand. According to Bank of Thailand’s loan survey, financial institutions are expected to remain cautious on loan conditions for mortgage and other consumer loans, owing to concerns over sluggish economic growth and housing market prospects.
With general elections in Thailand now postponed to mid-2018, the delayed return to civilian rule also remains a source of uncertainty.

ASEAN Economic Snapshot May 2017

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